U.K.-based Wood Mackenzie reports that in 2013, only 4 million metric tons (mt) of Australian coal production risks closure, even though 32 million mt of coal will yield negative margins, including capital sustainment.
Decisions to continue production instead of shutting down in Australia, according to the firm, have been largely contingent on transport and port contracts, also known as “take-or-pay” contracts—fixed-cost agreements leading most producers to subsidize capacity irrespective of tons shipped.
Stronger export growth relative to new capacity, consequently, will reduce the average per-ton costs miners pay for not fully using contracted capacity, the consultancy added.
In particular, Wood Mackenzie coal analyst Viktor Tanevski noted that 2013 saw “only two mine closures compared to seven in 2012; despite the low coal price environment, take-or-pay contracts are incentivizing coal producers to increase rather than reduce production,” as “the fixed cost of infrastructure makes shutting down even more expensive than the cost of maintaining production.”
Wood Mackenzie also estimates 4 million mt, or 1% of Australia’s 2013 coal exports, risk of closure based on hard coking coal prices of $171/mt, and thermal coal prices of $92/mt. The firm added that the amount at risk would increase significantly under lower prices.
Wood Mackenzie also concluded that if 2013’s average prices fall to $122/mt for hard coking coal and $77/mt for thermal coal, then 45 million mt, or 13% of Australia’s coal exports, will risk closure. At that price, a total of 204 million mt will suffer negative margins.
In all, “our expectation is there will not be a significant dent in Australia’s production this year,” said Tanevski. “However, if prices fall below expectations, the risk of closure for mines producing at negative margins will increase, reducing output.”